Introduction to Reciprocal Marketplaces

Most marketplaces are described using three primary characteristics: number of sides (1-sided, 2-sided, 3-sided or n-sided), geographic density and customer type (B2B, B2C, C2C). An element less frequently considered is "reciprocity". In this post we define "reciprocal marketplaces", explore their main properties and identify what is required to ensure their orderly function.

Characteristics

A marketplace is considered reciprocal when it functions as follows:

• Supply-side resources are provided by the demand-side actors
• Contributed resources constitute a shared pool that is accessible by any contributing demand-side actor
• Each demand-side participant has access to no more resources than they contribute​

Suitability

Reciprocal marketplaces are suitable when the following conditions hold true:

• ​The marketplace comprises two-sides: supply and demand.
• Supply-side resources are suited to multiple demand-side participants.
• Demand side participants maintain control or ownership over the supply-side resources that can be contributed to the market.
• Demand-side participants do not fully utilise the supply-side resources.
• Despite the overall under-utilisation of resources, frequently there is limited availability of resources relative to individual demand.
• Crucially, demand must be asymmetric. This means that, for example, all demand-side actors don't require the same supply-side resources at the same time.

​Examples of potential applications of a reciprocal marketplace can include torrent networks where users share CPU resources, advertising exchange networks, marketplaces for hourly workers, etc.

Requirements for Orderly Function

In order for reciprocal marketplaces to function properly, the marketplace enablers need to allow certain basic operations to take place. 

• Demand-side actors must be able to adjust the amount of contributed resources (i.e. increase them, thereby building up the supply-side, or decrease them should they no longer wish to share a particular resource).
• Demand-side actors must have  controls for managing the conditions of sharing (e.g. choose when a resource is shared, etc.). The conditions will vary, depending on the nature of the marketplace and the needs of the demand side.

Economic Benefits

Reciprocal marketplaces have all the benefits of traditional marketplaces, plus several more: 

For the supply side, the main benefit is improved utilisation: supply-side resources that were previously "owned" by a single actor (and were thus under-utilised) can now be used by multiple demand-side actors, each with asymmetric needs relative to each other.

For the demand side, reciprocal marketplaces provide higher probability of resource availability. This holds true even if the marketplace has only two participants. Secondly, improved utilisation of the supply-side resources can lead to lower costs.

For the marketplace enablers, reciprocal marketplaces are more capital efficient as they don't need to expend resources for building up the supply side. This also means there is no "chicken or egg" problem. Lastly, reciprocal marketplaces can be self-propagating as demand-side actors have the inherent incentive to both continually add supply-side resources to the marketplace and to invite other demand-side participants with asymmetric needs relative to them.

Mitigating ​Adverse Incentives

Enablers of reciprocal marketplaces should be aware of potential adverse incentives among participants and counteract them by enforcing certain marketplace rules:

• Hoarding: Participants could be tempted to consume more shared resources than they contribute. Therefore, strict hoarding limits must be enforced, whereby each participant must be able to consume no more resources than they contribute.
• "Free-floating" supply-side resources: The provision of unrestricted / free-floating / non-reciprocal supply-side resources decreases the incentives of demand side actors to contribute resources of their own, which undermines the reciprocal nature of the marketplace and impacts its rate of self-propagation.
• Mismatch in quality of reciprocal resources: Participants should feel comfortable that they will receive supply-side resources of "equal quality" as the ones they contribute. Conversely, certain participants could be tempted to contribute "low quality" resources in hopes of receiving higher quality ones in return. This can be mitigated in several ways: 
  - ​The marketplace enabler can continually monitor the quality of shared resources, removing those that are deemed unsuitable and possibly penalising bad actors.
  - If possible, the marketplace enabler can prioritise allocation of resources back to the participant that contributed them.
  - Contributed resources can become eligible for sharing only after suitable validation.